Chapter 2: Federal Gift Tax

Question 1

What are the differences between Federal Estate tax and Federal Gift Tax?

2.1

Answer 1

• Gift splitting is possible only with gift tax
• Annual exclusions only apply to gift tax -Gift tax is tax exclusive, Estate tax is inclusive
• tax basis for a gift is the donor’s tax basis, estate gift is stepped up in basis

Question 2

What are the similarities between Federal Estate tax and Federal Gift Tax? 2.1

Answer 2

-Unlimited marital deduction between spouses -Unlimited charitable deduction -Both have an Applicable Exclusion Amount ($11,580k) -Both have an Applicable Credit Amount ($4,577,800) —note that the credit is simply the percent of exclusion amount— -Cumulative

Question 3

Are you better off gifting assets or holding assets? 2.1

Answer 3

Gifting because gift tax is exclusive, estate tax is inclusive If you had $140k: -Gifting $100k means you pay $40k to the gov -passing on $100k means you pay $56k to gov

Question 4

What are gift tax return requirements? 2.1

Answer 4

-IRS Form 709 (706 is 6 feet under) -Due with regular tax return -Donor or donor executive must file it -The gift valuation date is the actual date that the asset was completed

Question 5

What is required for a gift to be valid? 2.1

Answer 5

-Completed transfer -must have valid acceptance by the donee

Question 6

How are gifted securities valuated? 2.1

Answer 6

Value of securities = average high and low price on the date of the gift…

If the security is not traded on date of the gift ( like if it were saturday) then calculate by:

1. Calculate FMV for last traded day
2. Calculate FMV on next traded day
3. Determine number of biz days between gift date and first trade date

Question 7

What are chapter 14 rules?

2.1

Answer 7

2701: Corporate and partnership recapitalization
2702: Grantor Retained Trusts

Question 8

How do you calculate gift tax?

2.2

Answer 8

Start with total tentative tax

— subtract prior taable gifts x tax rate

= current tentative tax

— unused applicable credit

— foregin gift tax credit

= net gift tax

Question 9

What are exclusions from gift tax?

2.2

Answer 9

• Contributions to political organizations
• Direct payment of someone’s med expenses
• Direct payment of someone’s tuition

Question 10

What are subtractions from gift tax?

2.2

Answer 10

• Split gifts
• Annual exclusions
• Marital deductions
• Charitable deductions

Question 11

What is gift splitting?

2.2

Answer 11

• Splitting between spouses so $30k can be gifted
• If there is any gift splitting, then all gifts must be split
• Both must consent to the gift
• At least one gift tax return must be filed
• they don’t have to file a joint return
  *

Question 12

Explain the difference between present and future interest gifts.

2.2

Answer 12

• Only present value qualifies for the annual exclusion

Question 13

When are assets entitled to a marital deduction?

2.2

Answer 13

• The property must be a non-terminable interest
• If the spouse can’t control where the asset will go at their death, then the marital deduction is not allowed

Question 14

What are Qualified Charitable Distributions?

2.2

Answer 14

• Purpose: be able to make a direct transfer from a qualified account to a charity. This could be the RMD.
  
  • Can’t do it until 70.5
• Limited to $100k per year
• It is not recognized as taxable income
• It is not deductible bc you technically never received it
• QCD can’t go to a doner advised fund

Question 15

WHat is a charitable remainder trust?

2.2

Answer 15

• The remainder of the assets in the trust will go to charity
• The trust is irrevocable
• Tax exempt entity
• Could be a (CRUT) charitable unit or (CRAT) charitable annuity
  
  • Unit is based on performance
  • Annuity is a fixed payment
• 20 year term limit if a term
• Payout must be between 5% and 50%
• Only CRUT allows for additional deposits
• The charital remainder must be >= 10%

Ex: Someone puts $1m of apple stock into a charitable check

• Gets an upfront charitable deduction for the total amount less what the donor will get back

Question 16

What is a charitable lead trust?

2.2

Answer 16

• The charity gets an income stream from the trust but the family gets the remainder interest of the trust at death
• Irrevocable
• Typically an annuity trust
• Not subject to the same max annuity payout
  *

Question 17

What is a pooled income fund?

(PIF)

2.2

Answer 17

• Typically for universities
• Allows you to put money into a fund and get an income stream
• Whatever the fund returns is what you get as an income stream
• Can’t be trustee at the colleege if you’re in the PIF
• Qualifies for the marital deduction if the spouse is the beneficiary
• They are run by a trustee

Question 18

What is a charitable stock bailout?

2.2

Answer 18

• For closely held stock
• Stock is gifted to a charity
• Company gets a deduction
• Corporation redeems the stock
  
  • Corporation is not under a legal obligation to redeem
• Purpose: Deductions
• Present interest

A small business gifts stock to a charity with the plan of buying it back. They get a deduction.. Essentially they are funnelling the stock from the shareholder to the charity and back..

Question 19

What is a charitable bargain sale?

2.2

Answer 19

• Sale to charity for less than full market value
• You get a deduction for the discount that you give on the sale to the charity (difference between FMV and what they paid)
  *

Question 20

What is a charitable gift annuity?

2.2

Answer 20

• Someone gives an asset to a charity but the charity can’t use the asset until the terms have been met
• The charity pays an annuity fixed payment
• Only do this with a well established charity
• Present interest to the charity

Question 21

When must a gift tax return be filed?

Answer 21

• whenever a married couple elects gift splitting
• If tehre is a future interest gift

Question 22

What form is used to file gift tax?

Answer 22

IRS Form 709

Question 23

How is the donee taxed on a gift?

Answer 23

Property received by a donee is not taxed as income unless the donee sells the gift.

The donee assumes the donors tax basis on the gift.

Question 24

When must a gift tax return be filed?

Question 25

Who is responsible for filing and payment of gift tax?

Question 26

When is a gift (aka lifetime transfer) considered a complete transfer?

Answer 26

When the donor relinquishes all control over the transferred property

Question 27

How is gifted life insurance valued?

Question 28

How is gifted tenants in common property valued?

Question 29

How is gifted JTWROS valued?

Answer 29

The FMV divided by number of owners

Question 30

How are tenants by the entirity propery valued?

Answer 30

Solely for married couples. Each spouse has half so property is valued at 50% of fmv on date of gift

Note for tenancy by the entirety that assets don’t go through probate

Question 31

How are commercial annuity trransfers valued?

Answer 31

1. If the annuity was giftd by assignment of ownership, it’s valued based on the replacement cost of the annuity
2. If a beneficiary is irrevocably designated to receive annuity payments the value is the PV of the right to receive the payments based on teh actuarial tables
3. If someone pays the premium for annuity, the value of the gift is the premium
4. If the primary annuitant designates a joint and survivor, the value is the cost of the joint and survivor annuity minus the cost of the single life annuity

Question 32

What is a crummey trust?

Answer 32

Gives the beneficiary 30 days to withdraw a specific portion from the trust.

Ensures the beneficiary has present interest therefore qualifiying for the annual gift tax exclusion

Question 33

Do gifts to a minors trust (section 2503c) qualify for the annual tax exlcusion?

Answer 33

Yes if they :

1. if the property and income may be expended by or for the benefit of the beneficiary before age 21
2. If the beneficary must be given the right to access on the 21st bday
3. if the bene dies before 21, the income will be payable to the minor’s estate or to whomever is appointed

2503(c) — “c” for closes out at 21

Question 34

What are requrements for the marital gift tax deduction?

Question 35

What is the terminable interest rule?

Answer 35

When the donee spouse is a sole beneficary to terminable interest in a property.

Question 36

What is a QTIP trust?

Answer 36

QTIP trust (AKA C Trust)

A husband with $20m in property is anticipating that he will die before his wife. If he dies, all of his property will transfer to his wife, thus his estate is 0. This would mean her estate is $20m meaning that when she dies her estate will owe ~40% estate tax on the amount of $11.7m.

If the husband opens a QTIP trust and puts $10m in it, then is is part of his estate when he dies meaning that he can use up his transfer tax credit and not pay any estate tax. Meanwhile, the wife has control over the income (but not the corpus!!) of the trust until she dies, at which point the reminder interest goes to the beneficiary.

Might be a good strategy for a spouse who has kids from a prior marriage—wife gets annual income until she dies, the husbands kids get the remainder.

Question 37

What is a Power of Appointment Trust?

Answer 37

(AKA A Trust)

A husband could set up this trust and name the wife as the general power of appointment. Because she has that power, she can name herself or anyone else as the beneficiary. This power also means that if she dies, the trust value is included in her estate. If she gifts the trust or names someone else as bene, she must pay gift taxes. Essentially the surviving spoiuse has total control of the assets.